Most investors will have a pretty good idea that the Rolls-Royce (LSE: RR) share price has been going great guns lately. It’s easily the most exciting stock on the FTSE 100, having soared 1,442% over three years.
The shares struggled after the pandemic, when air travel collapsed and engine servicing revenues dried up. Recovery began in 2022 as flying resumed, boosting income from maintenance contracts. The real transformation landed under chief executive Tufan Erginbilgic, appointed January 2023, who slashed costs, streamlined operations, and focused the business on cash generation and core growth areas.
FTSE 100 standout star
Latest half-year results, published on 31 July, showed first-half profits jumping 50% to £1.4bn, with free cash flow of £1.6bn. But after such a strong run, growth surely has to slow, especially with a toppy-looking price-to-earnings (P/E) ratio of more than 55 times earnings.
Rolls-Royce shares still have a bit of poke, rising exactly 100% over the past 12 months. Yet, two other FTSE 100 stocks have outpaced them over the same period. Gold and silver miner Fresnillo has surged 183%, driven by soaring precious metal prices as investors race for safe ports in today’s economic and geopolitical storms. However, I think it looks expensive with a PE of 77, and investors must think very carefully before they consider buying now.
Babcock is a big winner
It’s the second that really interests me, Babcock International (LSE: BAB), which has soared 141% over the past 12 months.
Babcock’s revival has been driven by the resurgence of Western defence spending following Russia’s invasion of Ukraine. Concerns about China’s stance on Taiwan have only intensified the push.
Rolls-Royce has benefited as well, through its defence division, but Babcock is a purer play on the sector. Lately, it’s even outpaced larger rival BAE Systems, up 41% over the last year. Starting from a smaller base and a lower valuation has helped Babcock go further, faster.
Strong results and solid growth
On 25 September, Babcock issued an upbeat trading update, with organic revenue growth and profit margins rising nicely. Its nuclear and aviation divisions performed strongly, securing major long-term contracts, including a £114m submarine deal for the Royal Navy and an eight-year contract with the Australian Border Force. The order book now stands at a healthy £10.4bn
Despite the share price surge, Babcock’s P/E ratio stands at a modest 23, far cheaper than Rolls-Royce or Fresnillo. Its market cap now nudges £6bn, so future gains may be slower.
In the event that we get some kind of workable peace deal in Ukraine, the whole mood could change and the Babcock share price could take a beating. It seems unlikely, though.
I think Babcock shares are worth considering with a long-term view, although the growth may slow from here. Brokers seem to agree. Consensus forecasts produce a median 12-month target of 1,257p, up a modest 5% from today. Six out of eight brokers still rate the stock a Strong Buy, though. None say Sell.
I’m generally wary of momentum trades, but Babcock still has wings. I think it could outgun Rolls-Royce over the next year, too. It’s also a great example of how overlooked UK blue chips can surge to prominence and make investors rich. There are more out there.
